101.04 Econ Introductory Micro Summer 2004 Prof. Potepan
Study Topics for Final Exam
The Final is next Monday, 16 August. Go through each of the multiple choice questions in Chapters 12. 13, and 17 of the Study Guide. As was true before, most of the multiple choice questions on the exam will be directly or indirectly based on the ones from these chapters in the Study Guide. In addition, be sure to go over the following topics in some detail: Chapter Twelve: Efficiency Loss due to Underproduction: be able to show on market supply and demand graph the Deadweight Loss due to underproduction in imperfectly competitive markets. Price Setting and Marginal Revenue: Be able to show in a numerical example (table of P's and Q's) that P > MR for price setting, imperfectly competitive firm. Know general shape of MR curve relative to Price line. Know how to draw an MR curve that is twice as steep as its price line. Profit Max Output and Amount of Profit from Graphical example For monopoly firm, find profit maximizing level q* where MR = MC simultaneously find profit maximizing price p* Remember, price will be on the price line, not the point where MR = MC. Calculate profit amount at q* where TR = p* x q* and TC = ATC x q* Show profit rectangle on graph If P > ATC at q*, show profit max output level that minimizes loss Calculate and show loss rectangle on graph Profit Maximization for Monopolies Work with Tool Kit 12.1 on page 158 and be able to answer questions similar to 1 through 3 on pages 159-160. Reasons for Monopolies - Know the three important reasons some markets are monopolies: Natural Monopoly (lowest AC for single producer), Government policy (patents, grants, franchises, etc.), and Control over essential resource (diamonds, bauxite, Barry Bond's ability to hit home runs, etc.) Price Discrimination: Be sure to be able to answer questions like 4 and 5 on pages 160-162. know and explain concept of price discrimination. Show on graph how a price discriminating firm can make higher profits by charging a higher price to consumers with higher willingness to pay, and lower price to those with lower willingness to pay, even though MC is the same for both kinds of consumers. Pure Monopoly: know basic characteristics of pure monopoly: single seller, product for which there are no close substitutes, and strong barriers to entry. Natural Monopoly: know the basic characteristics of a natural monopoly which is a special case of pure monopoly: High fixed costs and low and constant Marginal Costs produce conditions of Economies of Scale for entire demand in market. Be able to explain why in the case of Economies of Scale for whole market, one firm can produce any given output with less cost (lower ATC) than several firms. Monopolistic Competition: Know the basic characteristics monopolistically competitive markets: Many sellers, each firm's product is unique in some sense, but has many close substitutes produced by other sellers in market, and easy entry and exit. Profit Maximization for monopolistically competitive firms: show where MR=MC, determine profit maximizing output and price. Calculate profit and show rectangle. Show effects of entry into market: When there are profits, new firms enter market. Market supply increases, lowering the 'average' price in market, shifting in each firm's price line. Firms enter until price line becomes tangent to ATC curve and firms all earn zero economic profit. Oligopoly: Know the basic characteristics of oligopolistic markets: A few large sellers produce most of the output sold in the market, interdependence in price setting and other decisions, strategic consideration of how rivals will respond, entry strong barriers. Know the four-firm concentration ratio and how if can be used to measure the segree of oligopolistic control of a market
Cartels, Collusion, and Cheating Work with Tool Kit 12.2 on page 163. Be able to answer questions similar to questions 12 13 on pages 163-164. Note: ignore Tool Kit 12.3 and questions 14-17. know why and how it is more profitable for the firms in oligopolistic markets to collude if they can. Know why there are incentives to "cheat" on collusive arrangements. Know some of the informal ways firms can collude without formally joining a cartel. Know what kind of restrictive practices and entry deterrents are strong in oligopolistic markets. Game Theory and Prisoner's Dilemma Work with Tool Kit 12.4 and be able to answer questions similar to questions 18 20 on pages 167-168. Chapter Thirteen Drawbacks to Monopolies and Imperfectly Competitive Markets: know the major reasons why these Markets are less than ideal: restricted output (underproducing and overpricing) managerial slack, reduced research and development, and rent seeking. Deadweight Loss for Monopolies Many of you showed a great deal of confusion on Exam 3 about the general concept of deadweight loss. Learn how to correctly identify the area of deadweight loss for the monopoly underproduction (at Qm < Pareto efficient Qc). See Tool Kit 13.1 and questions 13 on pages 178-179. Policies Toward Natural Monopolies Know the natural monopoly policy dilemma: a natural monopoly can potentially produce the market output at a lower ATC than a number of competing firms but will restrict output and earn abnormally high profits if left alone. However, at the Pareto efficient P = MC output level, the firm would make a loss. Know and discuss the three ways government can deal with this dilemma: Subsidize private production at P = MC , Public Ownership and production at P = MC, and Regulation at P = ATC, even though P > MC. Anti-Trust Policies Know and be able to discuss the basic purpose of anti-trust policy. Know the important anti-trust laws and what they were designed to do. Know which arms and agencies of the Federal Government enforce anti-trust laws. Know and understand some of the problems inherent in defining the market for anti-trust enforcement. Know the benchmarks and legal criteria under which anti-trust enforcement takes place. Chapter Seventeen Financial Investments Know the basic characteristics of the various types of financial investments available to households: bank deposits, housing and real estate, bonds, shares of stock, and mutual funds. Know the concept of diversification and how it relates to mutual funds. Properties of Financial Investments Know the four important properties of all financial investments: expected returns, risk, tax treatment, and liquidity. Expected Rate of Return - Know how to calculate an expected rate of return from a simple numerical example. Be sure to learn the steps found in Tool Kit 17.1 and be able to work through problems like questions 1-2 on pages 221-222. Expectations Know how buyers and sellers of assets must form expectations about future prices. Learn the differences between myopic, adaptive, and rational expectations. Efficient Market Theory Know why in an efficient financial market, prices will fully reflect al the currently available information. Know why there should be no bargains if the market is fully efficient. Risk and Reward Learn about the tradeoff between risk and reward and be able to plot the graph of this relationship for a simple numerical example. Be sure to be able to work through problems like those found in questions 4-6 on page 222..